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BP Takes Stake in Rosneft for Hefty Payday

BP plc last week clinched a mega-deal to sell its troubled half-stake in Russian explorer TNK-BP to Russian energy giant OAO Rosneft for $17.1 billion in a cash-and-stock transaction.

Under the tentative terms, BP would sell its 50% interest in TNK-BP to Rosneft in return for $17.1 billion cash and a 12.84% stake in the producer, which when combined with BP's current 1.25%, would give it a a total of 14.09% interest. BP then plans to use $4.8 billion of the cash it receives to buy another 5.66% stake from the Russian government, which controls the company.

Once the deal is done, BP would have $12.3 billion in cash remaining and hold a 19.75% stake in one of the biggest integrated energy companies in the world. With close to a one-fifth ownership, BP expects to be able to account for its share of Rosneft's earnings, production and reserves on an equity basis, as well as gain one or two seats on Rosneft's nine-member board.

"This is an important day for BP," said BP Chairman Carl-Henric Svanberg. "Russia is vital to world energy security and will be increasingly significant in years to come. Russia has also been an important country for us over the past 20 years. Our involvement has moved with the times. TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia.

"Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, gives BP solid returns."

Last year Rosneft and ExxonMobil Corp. forged an agreement to jointly explore and develop projects in North America, including in Texas and the Gulf of Mexico, as well as in Russia and other countries (see NGI, Sept. 5, 2011). They also agreed to swap technologies. The deal with Rosneft may give BP some leverage over new agreements.

The loss of TNK-BP is going to impact BP's global output; it's half stake accounted for roughly 25% of BP's total output, or about as much as it produces in the United States, including Alaska. TNK-BP, which now is half-owned by Alpha Group Consortium (AAR), a group of Russian billionaires, is the country's third largest oil company. Rosneft plans to buy out BP and on Monday secured a $28 billion deal to buy out AAR.

If Rosneft can come to agreement with all of the parties, it would become the world's largest publicly traded oil company, with production of around 4.5 million b/d.

BP and Rosneft have 90 days to negotiate the sale and purchase agreements, which if all goes well, should be completed in the first half of 2013. BP also agreed not to sell any of Rosneft shares for 360 days once the transaction is completed.

"This investment builds on BP's track record of value creation in Russia," said Group CEO Bob Dudley, who once was BP's go-between in Russia before taking over as group CEO.

"It is consistent with our strategy of deepening our positions in the world's most prolific oil and gas regions...Rosneft is a company working to become a global leader in the sector. It is developing its substantial asset base with new technologies and improving its management processes and corporate governance. As a major investor BP looks forward to being able to contribute to Rosneft's success and add value through our participation on the board."

Since the Macondo well blowout in the Gulf of Mexico in April 2010, BP has been working to rebuild its reputation and pare down its drilling inventory to pay for the oil spill cleanup, as well as deal with the heavy weight of litigation and potentially big federal fines ahead. A trial originally set to begin in January to determine liability has been delayed to Feb. 25, U.S. District Judge Carl Barbier (see NGI, Feb. 6).

Earlier this year Dudley said the company had reached an operational "turning point" and was beginning to invest for the long term (see Daily GPI, Feb. 8). He called 2012 a year of "increasing investment and milestones" to build on the foundations laid in 2011.

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